In the survey, conducted July 8-13 and released Monday, 53 economists—not all of whom answer every question—were asked the main reason employers aren’t hiring more readily. Of the 51 who responded to the question, 31 cited lack of demand (65%) and 14 (27%) cited uncertainty about government policy. The others said hiring overseas was more appealing.
Only the conservative WSJ, the President, and Congresss could be surprised by these results. I’m not sure who these 53 economists were, but I think they must have been rather conservative, because the survey found that most did not think the government should do anything more to stimulate the economy.
Despite their forecasts for slow growth and an elevated unemployment rate, the economists aren’t in favor of further action either by the Fed or the federal government. Forty-one economists in the WSJ survey said the central bank shouldn’t pursue another round of bond-buying aimed at reducing interest rates, and thirty-eight said another round of fiscal stimulus shouldn’t be a part of any deficit-reduction package.
Economists added that they hope that as conditions begin to improve, albeit slowly, consumers will become more optimistic. “For whatever reasons, in addition to discrete headwinds, I think we’ve taken a hit to animal spirits and as those headwinds fade sentiment will revive,” said Stephen Stanley of Pierpont Securities. “Optimism can be self-sustaining, but pessimism can also provide a persistent drag.”
If any of the economists the WSJ talked to mentioned the possibility that the government itself could create jobs and thus stimulate demand–as FDR did the last time things were this bad, the WSJ did not report it.
Andrew Leonard crows:
what could be more obvious, even in the absence of rigorous training in economics? In the absence of demand, businesses will refrain from ramping up production and adding staff — no matter what employers think about the future regulatory climate. To prime this pump, to rev up this engine, to get the “delicate machine” working properly, the first focus for economic policymakers should be figuring out ways to boost demand.
Wouldn’t the best way to do that be to create jobs? Even Andrew Leonard doesn’t mention that. It seems ass-backwards to me to talk about getting consumers to spend more in order to get companies to start hiring. How can consumers spend more when many of them are unemployed? Maybe Dakinikat can explain this to me.
Anyway, it’s pretty amazing that the WSJ is admitting we have a demand problem. Now if only they could convince President Obama…
Forget giving away the store — Obama is handing the store to Republicans and inviting them to burn it down.Posted: July 5, 2011
Please read this shocking story at The New York Times — there’s no way for me to excerpt all the important parts.
Obama administration officials are offering to cut tens of billions of dollars from Medicare and Medicaid in negotiations to reduce the federal budget deficit, but the depth of the cuts depends on whether Republicans are willing to accept any increases in tax revenues.
Administration officials and Republican negotiators say the money can be taken from health care providers like hospitals and nursing homes without directly imposing new costs on needy beneficiaries or radically restructuring either program.
What this really means is that more doctors and hospitals will refuse to accept Medicare and Medicaid patients, and nursing homes will turn away frail elderly patients who can’t pay out of pocket–because Medicaid will no longer be able to assist those who are poor or have already spent their life savings on health care.
“Congress smells blood,” said William L. Minnix Jr., the chief lobbyist for nonprofit nursing homes.
Mr. Minnix, the president of a trade group known as LeadingAge, is urging nursing homes to “bombard your senators with the message that Medicaid cannot be cut by $100 billion” over 10 years, as President Obama and many Republican lawmakers have suggested.
A coalition of hospital lobbyists, worried about the direction of the budget talks, has begun a national advertising campaign to block further cuts in the two health care programs, which account for about 55 percent of hospital revenues. The hospitals have made a commitment to spend up to $1 million a week through August on television, print and online advertising.
Now check this out: Chuck Schumer, supposedly a Democrat, is quoted in the article as saying, “We are very willing to entertain savings in Medicare. Medicare gives very good health care very inefficiently.”
Really? Medicare has almost no overhead, and it pays way below the going rate for health care services. That’s why so few private doctors accept Medicare patients right now.
Now think about what Dakinikat has told us about the dangers of cutting federal spending and read this:
Medicare and Medicaid insure more than 100 million people, account for 23 percent of all federal spending and are likely to be an important part of any budget deal. Military spending, which accounts for about 20 percent of federal expenditures, is likely to be included as well.
President Obama and his Republican pals are on a mission to bring down the American economy and bring on a repeat of the Great Depression. Can anything or anyone stop them? We need riots in the streets, but can elderly people do it alone?
I’m not one to look back to the past. I definitely am not one to obsess on the past. It’s possible that my Buddhist training keeps me rooted in the pragmatic present. It’s likely that it had something to do with my bout with inoperable and deadly cancer. It took me at least five years to think beyond about one month. I completely lost my ability to project ahead during that time. While I have regained my foresight and I have an appreciation for hindsight, I’m still not one to rehash what coulda, shoulda, woulda been. However, Ruth Marcus shoved my thoughts back to the year of wishful thinking.
It was about 3 years ago when I started to realize who the only credible Democratic candidate was for the post-Dubya years. I came to that after listening to about three primary debates and reading a lot of background material. I was tempted by the lot of them but I always found it odd that the first one I discounted as more vice presidential material than presidential material given his appalling performance in the first primary debate wound up with the top job. The world keeps spinning on. We now have so many crazies in the Republican party that it’s a wonder they all don’t walk through the statehouse with a set of visible knuckles dragging the floor. The economy isn’t creating enough jobs to sustain us and we have people advocating the same kinds of policy that caused the great depression now. One of the worst ones wants to repeat the 20’s era Fed’s mistakes and is in charge of the House oversight committee on the Fed. Then, we have irresponsible tax cuts while running two wars. And THAT’s just a few of the economic policies ruling topsy turvy land these days.
So, again, my chagrin and thoughts were peaked by this Ruth Marcus Op Ed piece. So, I had to look back to read now and look forward.
For a man who won office talking about change we can believe in, Barack Obama can be a strangely passive president. There are a startling number of occasions in which the president has been missing in action – unwilling, reluctant or late to weigh in on the issue of the moment. He is, too often, more reactive than inspirational, more cautious than forceful.
Each of these instances can be explained on its own terms, as matters of legislative strategy, geopolitical calculation or political prudence.
He didn’t want to get mired in legislative details during the health-care debate for fear of repeating the Clinton administration’s prescriptive, take-ours-or-leave-it approach. He doesn’t want to go first on proposing entitlement reform because history teaches that this is not the best route to a deal. He didn’t want to say anything too tough about Libya for fear of endangering Americans trapped there. He didn’t want to weigh in on the labor battle in Wisconsin because, well, it’s a swing state.
Yet the dots connect to form an unsettling portrait of a “Where’s Waldo?” presidency: You frequently have to squint to find the White House amid the larger landscape.
This tough assessment from someone who generally shares the president’s ideological perspective may be hard to square with the conservative portrait of Obama as the rapacious perpetrator of a big-government agenda.
Then, read on, the rationalizations are still there but we finally get back to the punchline: “Where’s Obama? No matter how hard you look, sometimes he’s impossible to find.” I’d just like to say that any one with an impressive career of voting present so many times, who was known to hide out in bathrooms during the tough votes, spent his entire senate career campaigning and not voting, and only introduced minor legislation into the Chicago legislature after it was carefully crafted by others already had shown his brand of leadership. How a standing record that was way out of its way in proving “he who hesitates is lost” got translated into national ‘hope and change’ by so many people will be something I will ask myself whenever books come out with themes similar to Marcus’ WAPO musings. Past performance is usually an indicator of future performance. Next time, check your data. That is all. Back to the present for me.
I’ve actually been avoiding writing about the economic news these days because frankly I don’t want to harsh your mellow this holiday season. The Fed’s Open Market Committee is meeting the next few days and Dr. Bernanke’s study about Monetary Policy at the Zero Bound is likely to be on the agenda. We’re so close to zero interest rates in the credit markets, traditional monetary policy is basically off their table. You’re going to hear words like liquidity trap (where the interest rates are so low that every one prefers to sit on cash and banks really don’t want to lend at that rate). You’ll also hear about ‘quantitative easing’. This is where the Fed uses it’s own balance sheet and it’s own assets to try to prop up the economy. These are all moves tried by Japan in the 1990s during its lost decade. We’re still debating their efficacy and the results look mixed. The Fed can look around its tool box all that it wants but it’s doubtful to find a stash of viagra. If you want a medical metaphor, the Fed is basically using untested methodology–like those tests of procedures they only let participants into if they’re terminal. The Fed’s on the side lines. We’re going to have to rely on stimulus from the folks in Congress and the incoming/outgoing adminstrations now. (Greater Ethos help us!)
I’ve been looking over the recent numbers (yes MyIQ2xu, i’m throwing those fried chicken entrails again) and what’s really got me in a quandry is the number of times I see leading indicator numbersthat are only comparable to Hoover’s time. In my three decades of economic study, I have NEVER had to harken back to Hoover’s time as anything more than a history lesson. We seem to be hitting records on the downside that are puzzling even the brightest economist and believe me, I’m not among those. However, I’ll try to give you a feel for some of the major indicators and why the global economy appears to be in for a long period of distress.
The Fed is likely to cut interest rates to 50 year lows some time in the next two days. As I said, no one is expecting that to do much good but it will act as a signal that the Fed continues to follow serious expansionary policy to boost the economy. It has a lot of leeway now because the recent inflation numbers are astounding. Economists are expecting Thursday’s inflation rates to be the lowest since 1938 on the upside (1.4%) and the lowest since 1933 on the downside of the forecasts. Estimates by some economists have the U.S. economy experiencing its first negative year over year inflation since the 1950s. This news is a mixed bag. Basically if you’re a consumer, everything you want is about to become very cheap. The problem is with the next set of numbers. How many folks will be in the position to buy them?
Some times I feel like I spend a lot of time reading entrails or the lay of chicken bones. I pour over numbers, announcements, and signs of momentum much like Marie Laveaux–that great voodoo priestess buried not all that far from my own house–would check for auspicious signs. In academic terms, I’m analyzing the fundamentals for signs of bottoms or inflections looking for some hint about this downturn. Some how, however, I still find myself relying on a lot on intuition in the end. This still makes me feel less like a scientist and more like a modern voodoo priestess.
So, what do the fundamentals say right now? There are several markets that might give us a glance at the entrails of the U.S. economy. The first is what households (consumers) are planning to do. The biggest component of US spending in the economy belongs to consumers. They are responsible for about 70% of sales of all goods and services. The last time consumer spending decreased was during 1991 during the post Gulf War 1 recession. Most economists expect that they went negative some time this fall. One of the measurements we check to see if this will become a trend is the Reuters/University of Michigan index of Consumer Sentiment. This is basically and index that summarizes the results of a survey of how optimistic or pessimistic households are about their economic future. If they are optimistic, they usually spend more. This blurb of bad news is from the Wall Street Journal.
After hitting its lowest level in nearly 30 years in June, the gauge had begun to improve as oil and gas prices fell from their record highs. But that improvement was wiped out this month as financial and economic conditions worsened.
Unfortunately, we just hit an all time record low on the measurement for this month. That is not a good thing. If you look at where the economy is soft, it is on those businesses that provide big item tickets to households. This includes things like cars and washing machines. Households are less likely to buy big ticket items when they feel unsure about their future. Companies that have announced lay-offs and plant shut downs recently include GM and Whirlpool. This confirms our suspicion that consumers are laying low. Kraft, however, is doing well. It posted a third quarter gain. That’s because folks that tighten their belt eat a lot of those mac and cheese boxes. This also is something that says we’re looking at a recession.
The good news is that business orders of some of this big ticket items appears to be looking up. This is good news because businesses tend to order these things if they see next year being better than this year. Civilian aircraft orders appeared to be the mover in this statistic. Also transportation equipment. Durable goods orders by manufacturers are considered a ‘leading indicator’ of future economic health, compared to consumer sales which are considered a look into the current economic health. This is because businesses buy based on what they expect to do next year. This gives us slight hope that next year might be better than right now.
Another fundamental to watch for indications of a sluggish or recessionary economy is the job market. Most economists follow a number of statistics here. We usually don’t rely on the unemployment rate because it hides a lot of information. Two of the big things it hides are folks that still want jobs but have given up on their job search and folks that are working part time jobs when they really want full time employment. Here is some information on jobless claims from that same WSJ article. That statistic is another indicator followed by economists.
Many economists more closely monitor the Labor Department’s weekly report on initial unemployment insurance claims, which measures the number of people filing for new unemployment benefits. A rule of thumb says that when claims stay above 400,000, the economy is slipping into recession. That started happening in July. The latest weekly claims figure is 478,000.
Unemployment tends to ‘lag’ or move behind a recession. It will frequently increase even when the economy rebounds. So, expect unemployment to be a problem for some time.
By following some of the statistics, economists get a good sense on how deep and long this downturn may be. Again, it is a bit like Marie LaVeau reading entrails. From some of the things we see so far, we expect this downturn to be longer and deeper than the last two which occurred in 2001 and 1991. However, because of little glimpses of hope, like the uptick in Manufacturer’s Durable good orders, most economist do not believe we’re about to see the Great Depression again. Because economists have gotten better at reading the entrails, economic advisers on policy have gotten better at recommending policies to government to stymie the worst of possibilities. So I’d just like to say again that you should act with prudence moving forward but not panic. This is, after all, a very resilient country with an economy that has survived a lot worse things.
PS: No chickens were harmed in the writing of this thread.
I thought I’d try to give you some information on the mixed signals coming from the markets. First, we have the credit markets where people borrow and lend things like commercial paper, loans, and bonds. All of the money thrown into this market by the world’s governments appear to be having some impact.
How do we know this? As reported by The Economist, we see signs that banks are lending to each other and that interbank lending rates are behaving more normally.
An important indicator of its health is the price that banks say they expect to pay to borrow money for three months, which is usually expressed as the London Interbank Offered Rate (LIBOR), or its European equivalent, EURIBOR. These have been ticking down slowly, often by only fractions of a percentage point a day. Yet on Tuesday October 21st the rate for borrowing euros passed an important milestone, falling to 4.96%, a level last seen before Lehman Brothers collapsed in mid-September. The LIBOR spread over three-month American Treasury bills has also narrowed sharply. The recent improvements were partly stirred by the latest lavish intervention from the Federal Reserve. It made available $540 billion to buy assets from money-market funds, to encourage them to start buying commercial paper issued by banks and companies again.
A few words of explanation here. First, the Libor Spread over three-month Treasury bills is called the Ted Spread. Since the three month treasury bills are considered extremely safe, this spread is considered a measure of risk as perceived by the market. The bigger it is, the more likely banks are to see risk or some kind of uncertainty in the market. When you have a so called flight to quality, folks and institutions buy a lot of three month treasury bills and drive the yields down. This makes the spread widen. The Libor and the Eurobor are like the Fed Funds rate. These rates are established by the market for lending between banks. Banks that require more liquidity to cover things like withdrawals, loan losses, or reserve requirements for a very short period of time will borrow from other banks rather than go to the FED or their central bank. It is a market that shows how needy banks are for cash. Like all things related to supply and demand, when supply is short and demand is high, the loan rate goes up.
When the banks book the loans, and report the loans to their regulator, the regulator sees this market established rate and based on if it wants banks lending or holding on to money, will set its own rate. This is called the Discount Rate in the U.S. It is the loans you get from the Fed which is the lender of last resort. Remember, as of this spring, all financial institutions (FI), not just member banks, can access the discount window. Also, when borrowing at the discount window, the FI is required to put up some collateral. Many things are now being accepted as collateral–including toxic assets.
If this rate and the spread are ‘ticking down’ that means more and more demand is driving the rates down. The only reason that banks would increase their demand for these funds would be to lend at higher rates. This lets us know that the credit markets are slowly unthawing. We can see this further, as The Economist reports, in the market for interbank lending. Loans are being made between banks.
American banks including JPMorgan Chase and Citigroup have, in the past week, made loans to European counterparts for up to three months. And HSBC, Europe’s biggest bank, says it is providing billions in three- and six-month funding to banks.
This is a very good sign for the credit markets.
So, why are the equity markets still volatile and the major indexes falling? Equity Markets respond to more ‘REAL’ phenomenon because the earnings of companies are based on projects that either yield income or losses. The stock markets which sell pieces of companies and their future earnings are reacting to economic news. The economic news is looking pretty dismal right now.
Last week, the UK announced that it was in a recession. Most economists (including me) think we have entered a recession now in the U.S. This is spilling over to the global economies that rely on exports (like China, India, and any of the oil-exporting countries) because if they’re not selling to their customers, their companies are not making any income. No income on projects means stock values fall.
The global credit crunch is quickly turning into an economic crisis. At least, that’s what the markets feel. Stock markets all over the world and markets for foreign currency are sinking. The pound is doing miserably. The Eurodollar is one of the better-off currencies. The dollar is showing some recovery which is a bit odd given we’re considered the source of all this mess. However, we are the world’s currency and considered a safe-haven, so it might just be that old fashioned flight to quality again. I have to say, it’s very hard to tell at this point. It looks like the world still likes us to me. But this is just my analysis.
So the fundamentals here in the U.S. economy are pointing to a recession that will look more like the one in the 1980s than the last two short downturns experienced in the 1991 and 2001. This from today’s New York Times:
When October’s job losses are announced on Nov. 7, three days after the presidential election, many economists expect the number to exceed 200,000. The current unemployment rate of 6.1 percent is likely to rise, perhaps significantly.
“My view is that it will be near 8 or 8.5 percent by the end of next year,” said Nigel Gault, chief domestic economist at Global Insight, offering a forecast others share. That would be the highest unemployment rate since the deep recession of the early 1980s.
Companies are laying off workers to cut production as consumers, struggling with their own finances, scale back spending. Employers had tried for months to cut expenses through hiring freezes and by cutting back hours. That has turned out not to be enough, and with earnings down sharply in the third quarter, corporate America has turned to layoffs.
This and the fall in housing prices as well as bank failures have lead people to wonder about another Great Depression. For the answer to this, I point you to an Economic View that also came from the New York Times by well-respected Economist Gregory Mankiw. He points out to some very important reasons why this may be a bad recession but is unlikely to become another Great Depression. Here’s perhaps his most cogent argument on why this is unlikely to happen.
Probably the most important source of recovery after 1933 was monetary expansion, eased by President Franklin D. Roosevelt’s decision to abandon the gold standard and devalue the dollar. From 1933 to 1937, the money supply rose, stopping the deflation. Production in the economy grew about 10 percent a year, three times its normal rate.
We are no longer constrained by a fixed money supply and we have a Fed that knows a lot more about what causes crises. (Mankiw is a fairly conservative economist so this is a telling comment.) Widespread deflation (decreases in prices) were a problem during the depression years. The only major deflation we’ve had to date is in house prices. We’re now experiencing decreases in oil prices but unlikely to see declines in other items, like food and clothing. Oil prices were considered way higher than the fundamentals would suggest so this decrease is likely to help the economy. It is possible that air fares could come down, for one.
Also, I’ll point to the information reviewed in The Economist, loans were nearly impossible to get during the Great Depression. The world’s Central Banks are taking huge steps to ensure this doesn’t happen, and it appears their steps are working. Oddly enough, sales of existing homes went positive last month. It’s hardly a trend, but it does show a possible break in the downturn.
So what exactly do we see here? There are plenty of signs that we’re in for a fairly sustained recession through next year. Again, hold on to your job if you have one. Markets are trying to find their bottom. The Dow Jones is hovering around 8200 which is considered a threshhold level. There is some volatility but nowhere near the volatility we saw during the Great Depression. Credit Markets are thawing which means monetary policy may have a chance at jump starting the real economy again. The mini-rally in the dollar shows that the world still has a lot of faith in the fundamentals of the U.S. economy. We’re still considered that quality that attracts money. Don’t pull money out of anything long term. You’ll probably be selling it at a low. Try not to look at your 401k statements for awhile. Look for bargains if you do have money– vacations, cars, houses, and anything else that you’ve intended to buy but only if you know your job is safe and you have a nice emergency fund. If you don’t have an emergency fund ( about six months worth of income in a bank account), start one today.